 In continuation to our last session on elasticity of demand, in today's class again we are going to analyze, see how the change in the demand due to few other factors which influence the demand. So, today we are going to check the income elasticity of demand, cross price elasticity of demand and we will solve few numerical related to the elasticity of demand. So, if you remember in the last class, just we do a quick recap of the last session what we have covered. If you remember there is we discussed about the simultaneous shift in the demand and supply, how it changes the equilibrium price and quantity. Then we introduced the concept of elasticity of demand which is something more than the simply identifying the relationship between demand and price rather it also check the relative magnitude of change in the demand due to change in the price. Then we talked about degree of price elasticity of demand, then elasticity, how elasticity and revenue they are related, what happens to total revenue when the demand is elastic, when the demand is inelastic and finally we discussed about the few factors which influence the price elasticity of demand. So, in continuation of these topics today we will discuss our the next type of elasticity of demand that is income elasticity of demand. As we know that consumer income is one of the factor which influence the elasticity of demand or may be which influence the quantity demanded. So, what should be the change in the quantity demanded when the consumer income changes, whether it increases or whether it decreases what happens to the quantity demanded and what is the exact proportionate change in the quantity demanded when there is a change in the income. So, income elasticity of demand it generally measures the responsiveness of the quantity demanded to change in income holding price of the goods and all other demand determinants constant. So, it is basically a relationship between the change in the quantity demanded and change in the income keeping all other variable constant which influence the demand. So, how sensitive the consumer to the change in the income when income increases whether they consume more, when income decreases whether they consume less. What is their reaction to the purchases of luxury goods, purchases of comfort goods, purchase of the necessity goods, whether the change in the income or whether there is a change in the income in the positive and the negative direction. Now, how to find out what is the change in the income or by what proportionate the quantity demanded should change whether the change in the income. This we can find out by following the formula that the percentage change in the quantity demanded by percentage change in the income. Here Q D is the quantity demanded, M is the income and if you simplify this again this becomes del Q D by del M multiplied by M and Q D. M is the original income Q D is the original quantity demanded. Del M is the change in the income and del Q D is the change in the quantity demanded. So, we can find out the income elasticity of demand by del Q D by del Q D by del M multiplied by M by Q D. Now, how we should interpret this income elasticity of demand, we are going to get a value. If the value is positive then this is the case of a normal goods. Now, why it is positive for a normal good because if you see now real life also when there is a increase in the income generally that leads to increase in the consumption and in case of normal good it happens that when increase in the income generally increase in the purchases of the normal goods. If the value is negative this is the case of a inferior good. Now, why it is for inferior good? I will just give a small example over here. Suppose you are using public transport every day to commute to the office or commute to your college. Now, when income increases you prefer to buy a vehicle of your own rather than using the public transport. So, in this case the public transport has become a inferior good and the quantity demanded decreases or the huge decreases for the public transport when there is a increase in the income. So, the relationship between the income and quantity demanded of the public transport is inversely related and that is the reason we get a negative value of income elasticity of demand. Income increases the consumption of the inferior good decreases because the consumer has now the capability to consume a superior good with the increase in the income. That is the reason the income elasticity of demand is negative for inferior good which implies that when income increases consumption of the inferior good generally decreases. Similarly, if the value is 0 then it is neutral goods. So, what are the neutral goods generally? If income increases we do not eat more, if you are taking the example of a food item when income increases we do not increase our intake rather what we do we look for the better quality, we look for the better brand with the increase in the income. So, if you look at the food intake remain constant even if the there is a increase in the income. So, in this case we can consider food item is neutral goods because it never changes with the change in the income even if it is increasing. Similarly, if there is a decrease in the income the food intake never goes down because that is required for survival and even if there is a decrease in the income generally we find the other way out to consume that much amount of food intake. So, in this case if you look at this is a case of neutral good and what is the nature of change in the income in case of the neutral goods there is no change in the quantity demanded because of increase or decrease in the income. So, in this case the income elasticity of demand takes the value is called to 0 and generally in this case we interpret this as the good the nature of the goods as the neutral goods. Similarly, if you categorize the goods according to the luxury necessity and semi-luxury goods or the comfort good in this case how the value on the basis of value how we can interpret what kind of good. If the income elasticity of demand is greater than 1 this is the case of luxury goods and it is more than proportionate increase in the sales. So, if you if you looked at this change in the quantity demanded due to change in the income like this is your quantity demanded this is your income. Now, when there is a change in the income suppose by del that leads to change in the quantity demanded. So, if the proportionate change in the quantity demanded is more than proportionate change in the income this is the case of a luxury goods. If the change in the quantity demanded is less than change in the income this is the case of a semi this is the case of a necessity good like and if like and if the change in the quantity demanded is just equal to change in the income, this is the case of your comfort good or semi luxury goods. Now, let us interpret these three types of good. So, first case we are saying this is a luxury good because change in the income is less than the change in the quantity demanded, this happens for the quantity demanded. Now, when we plan for buying a house or buying a vehicle, it is not that the value of the vehicle or the value of the house by that percentage our income has changed. But at least when there is an increase in the income, we can buy those goods at a monthly basis by paying monthly basis like if you look at the schemes of AMIs and all this. In this case you can buy a high value product when at least you have the capability to pay the installment. So, in this case the percentage if the income is increasing by 20 percent, if I am going to the next band, I can see that this 20 percent I can pay as the monthly installment for buying a high value product. So, in this case it happens that even if the increase in the income is just 20 percent, the consumer makes the purchases which is more than the worth value of 20 percent. But in this case generally this is the case of the luxury goods. Similarly, if we teach income elasticity of demand is less than 1, it means the proportionate change in the quantity demanded is less than proportionate change in the income and this happens in case of necessity goods. Like just now we are taking the example of food intake, this is necessity goods. So, if the income increases by 10 percent, my entire 10 percent I am not going to spend on the food item or the necessity goods. What I will do may be part of it I will spend and I will look for the better quality in the food in food range, but I am not going to spend entire 20 percent on the entire 20 percent increase in the income only consuming more food or the better quality of the food. If it is equal to 1, then it is a case of semi-luxury goods or may be case of the comfort good. So, in this case if my income increases by 20 percent what I do generally I generally I buy more from the income, but that is not that is exactly the same proportion whatever the change in the income. So, if there is a 20 percent change in the income I will buy a product which is worth of 20 percent not more than that. So, in this case the percentage change in the quantity demanded is just equal to the percentage change in the income. So, if elasticity of demand is greater than 1 this is the case of luxury goods the proportionate change in the quantity demanded is more than the proportionate change in the price. If the income elasticity of demand is less than 1 then in this case the proportionate change in the quantity demanded is less than proportionate change in the income. If income elasticity of demand is equal to 1 the proportionate change in the income is just equal to the proportionate change in the quantity demanded. Now, where generally the use of income elasticity of demand comes? So, income elasticity of the products is highly significant in the long run planning and management of production, especially during the periods of business cycle like where there is if the income increases, if the quantity demanded changes in the different direction, generally the it helps the producer to identify ok, if income is increasing or decreasing, the demand is going to increase and that way generally they plan for their production. It can be also used as the estimation of future demand, provide that rate of increase of income and income elasticity of demand for a given product are known. It means, if there is a there is going to increase in the income, if there is a forecasting or if there is a prediction that income is going to increase, in this case the producer can plan that ok, if the income is going to increase for some goods the quantity demanded is also going to increase and in this case may be they are planning to produce more that helps them to get some more amount of the profit. This can be also useful in forecasting demand for the expected changes in consumers personal income, all other things at least remaining constant. So, knowledge of income elasticity of demand is helpful in evidence of over and under production as we discussing now that when you know that income is going to increase quantity demanded is more. So, you know that is the exact amount of production you are going to produce, but for producer it helps in such a way that if income is going to decrease they are going to produce less, if income is going to increase they are going to produce more. So, that generally avoids the over production and the under production. Then we will come to the different type of price elasticity of demand that is cross price elasticity of demand and if you remember there is one factor which influence the demand is the price of related goods in the market. Like we always take the example of tea and coffee what happens to the quantity demanded of tea when the price of coffee increases or what happened to the quantity demanded of coffee when the price of tea decreases. Since both the goods are related to each other, both the goods are substitute to each other whenever there is a change in the price of one commodity that leads to the change in the price of the other commodity that we capture through the cross price elasticity of demand. What is the relative magnitude of change in one quantity demanded when the price of the other changes? So, cross price elasticity of demand measures the responsiveness of the quantity demanded of good X to change in the price of related good Y holding the price of good X and all other demand determinants for the good X is constant. So, if there are two products X and Y cross price elasticity of demand measures the change in the quantity demanded of X when the price of Y changes keeping the price of X remain constant and all other factor that influence the price of the or the quantity demanded of the X that is remain constant during the study period. Now, what is the formula to calculate this cross price elasticity of demand? Suppose there are two goods X and Y in this case the formula to calculate the cross price elasticity of demand in term of the relationship between the quantity of X and price of Y. So, this is change in the quantity of X percentage change in the quantity of X open the percentage change in the price of Y because the price of Y changes that leads to change in the quantity of X, X and Y their substitute goods and here we are measuring what is the exact proportionate change in the quantity of X when there is a change in the price of Y. If you simplify this then this become del Q X by del P Y multiplied by P Y and Q X. So, Q X is the quantity of X P Y is the price of Y and del P Y is the change in the price of Y del Q X is the change in the quantity demanded of X. Now, if the value of cross price elasticity of demand is positive then two goods are substitute if it is negative two goods are complement why it is substitute when two goods are positive. So, if you know that X and Y these are the two products those are in question. Now, here we are measuring what happens to change in the quantity of X when there is price of Y changes. Now, how X and Y is related suppose both of them their substitute. So, price of H for law of demand when price of Y increases that leads to decrease in the quantity of Y people those who are consuming this P Y now they will prefer to consume good X and that will lead to the increase in the quantity of X. So, how P Y and Q X they are related they are related in a positive sense because when P Y is increasing that also leads to increase in the Q X and that is the reason if the cross price elasticity of demand is positive. We generally interpret this as the substitute good because price of price of Y is leading to change in the quantity demanded of X. So, the positive value of cross price elasticity of demand implies that both the goods in the question they are the substitute to each other. Now, we will see how it is negative for the complementary good. Suppose X and Y they are the complementary goods it means if the consumer has to consume X he has to also consume Y and if the consumer has to consume Y he has to consume X. So, one good cannot be consumed without the consumption of the other good. Now, we will see how they are related price of Y increases leads to quantity of Y decreases because according to law of demand whenever there is a increase in the price that leads to decrease in the quantity demanded. If this happens if the quantity of Y decreases you cannot consume X alone in order to consume X also you need Y. So, that leads to the fact that quantity of X also decreases. So, now how they both of them are related price of Y increases leads to decrease in the quantity of X and you get a negative value of the cross price elasticity of demand and you can interpret this as whenever there is a negative cross price elasticity of demand that leads to the fact that both the goods in the question they are negatively related to each other and their complementary in nature. Then we will introduce a new type of elasticity demand which is more recent it has come into picture that is promotional or advertising elasticity of demand. So, if you know the there is a fact that whenever the company they spend more on the advertisement and other sales promotion activity it helps in promoting the sales, but not in the same magnitude or degree at all level of sales. If you look at whether it is TV commercial whether it is hoarding whether it is may be the through any other form of media or a newspaper you will find the advertisement and the sales promotion activity may be its discount may be its just reaching out to the consumer company they massively do that during specifically if you look at the festive season. But does the quantity demanded also changes when this advertisement is there and the sales promotion activity is there? Obviously, there are a few changes in the quantity demanded because consumer they knows that this is the product available in the market this is the price, but by what percentage or by what magnitude the change in the quantity demanded takes place due to change in the sales promotion or due to change in the advertisement expenditure that will capture through the advertising elasticity of demand. So, why it is useful? It is useful in the determination of the optimum level of advertisement expenditure. It means if there is no increase in the sales even if the advertisement expenditure is increasing day by day or on a regular basis the company need to again rethink that whether they are doing a right kind of investment by investment in the advertisement expenditure because that is not leading to any changes in the quantity demanded any changes in the sales revenue or any change in the sales quantity even if there is a increase in the advertisement expenditure. So, this advertising elasticity of demand will help to determine whether that is the right amount of advertisement expenditure or there is need of more advertisement expenditure for increasing the sales. This as you may greater significance as a decision variable because as we are just explaining if you are doing certain amount of advertisement expenditure whether this is require more or whether this is require less and this is especially when the government imposes the restriction on advertisement cost as is the case of most developed economy there is a competitive advertising by the rival firm. You cannot just go on advertising there is some restriction quota at least in the developed country this help in this scenario the advertising elasticity of demand helps to identify what is the right kind of advertisement expenditure or what is the right kind of sales promotion. Now, how to find out this advertising elasticity of demand? Now, this is how to find out the relative magnitude and how to find out the what is the responsiveness of the quantity demanded what is the responsiveness of the consumer to the change in the expenditure on the advertisement on the other sales promotion activity. So, promotional and advertising elasticity of demand measures the response of quantity demanded due to change in the expenditure on advertising and other sales promotion activity. Now, how to calculate this? Suppose EA is the advertising elasticity of demand and how we will calculate this it will take a formula that is del Q by del A or the change in the Q with respect to change in the advertisement expenditure multiplied by advertising expenditure and the quantity demanded. So, Q is the quantity of goods sold A is the unit of advertising expenditure on goods the advertisement elasticity of sales it generally varies between 0 to infinity sometimes it is in one extreme sometimes in the other extreme. So, if that means, if it is 0 whatever may be the advertising expenditure there is no change in the quantity demanded and if it is infinite then if small change in the advertisement expenditure leads to greater change in the quantity demanded. Now, how do you interpret the value of this advertising elasticity of demand? If advertising elasticity of demand is equal to 0 sales do not respond to the advertisement expenditure. If advertisement expenditure is less than if greater than 0 and less than 1 we can interpret this value as increase in the total sales is less than proportionate to increase in the advertisement expenditure because it is greater than 0, but less than 1. So, the proportionate increase in the total sales is less than the proportionate increase in the advertisement expenditure. If advertisement expenditure is equal to 1 sales increase in proportion to increase in expenditure on advertisement. It means 10 percent increase in the advertisement expenditure is just 10 percent increase in the sales quantity or the sales whatever the change in the sales. If advertising elasticity of demand is greater than 1 sales increase at a higher rate than the rate of increase in the advertisement expenditure. It means the proportionate increase in the quantity demanded of sales is greater than the proportionate increase in the advertisement expenditure. Now, what are the factors those affects the promotional and advertisement elasticity of demand? The first one is the level of total sales. Its sales increases the advertisement elasticity of sales decreases. Now, how this is related to advertisement elasticity of demand? H sales increases the advertisement elasticity of sales decreases because it is irrespective of the fact that whether there is advertisement or not still there is a increase in the total sales means there is no influence of the advertisement expenditure on the sales of the product. Now, the second factor the advertisement by the rival firms how it affects the advertising elasticity of demand? If we look at in a highly competitive market the effectiveness of the advertisement by a firm is determined by the relative effectiveness of the advertisement by the rival firm. If the advertisement is more better than the advertisement of this firm generally that affects the advertisement elasticity of demand. Like if you look at the same product get endos whether you take the example of coke and Pepsi. If you look at for one celebrity one celebrity is advertising for the other one you will find the competitive celebrity is advertising for this. So, if the competitive celebrity is better than this celebrity sometimes it influence the advertising elasticity of demand because some at least some percent of the consumer some segment of the consumer they always they have the loyalty for the celebrity and they prefer to buy that. So, in this case the advertisement by the rival firms they plays a greater role when it comes to the value of the advertising elasticity of demand. Similarly, the third factor the cumulative effect of past advertisement or the additional doses of advertisement expenditure do have cumulative effect on the promotion of sales and this may considerably increase the advertisement elasticity of sales. So, if there is some cumulative effect like what is the cumulative effect over here? If the product is continuously on the consumer minds some change it brings some change in the advertisement elasticity of sales. Like if you take the example of the soap locks it is there since of the since the beginning the product remains same there is no more change in the product, but the celebrity who endorse for the product that changes or if you take the example of typically all FMCG goods generally the no much change in the product, but every time they comes they comes the advertisement with a new kind of new kind of may be concept or the new celebrity that again brings some fresh to the freshness to the consumer mind for this product. So, even if they are consuming the product over a long period of time still they prefer to consume the same product because it gives a newness in term of the new kind of advertisement expenditure. Then apart from this three factor there are few other factor that also influence the advertisement elasticity of sales like change in the product price, the consumer income and growth of the substitute goods and the price. Like if it is there is only one goods in the or may be there are few goods in the market if the goods is doing over if one of the product is doing good over a period of time generally you do not require much of the advertising elasticity of demand, but if there are many products available in the same category many substitute products available in this case the company has to go for a massive advertising massive promotion activity then only that leads to the increase in the quantity demanded. So, in this case if you look at at least initially the elasticity of advertising elasticity of demand will be less than one because the proportionate change in the quantity demanded will be less than the proportionate change in the advertising expenditure. They have to do a massive scale of advertisement in order to increase the quantity because there are many more substitute products available in the market.